Birmingham: That's Not Our Problem

WSJ's Michael Corkery visits Mean Street with a look at Jefferson County, Alabama, which last year filed the biggest municipal bankruptcy in U.S history, and nearby Birmingham, hoping to not get caught up in the negative news. Photo: AP.

By

Michael Corkery

June 25, 2012 6:53 p.m. ET

Officials from Birmingham, Ala., say they have a lot to offer municipal-bond investors: a jobless rate below the national average, a credit rating on par with New York City's and lots of cash in reserve.

Birmingham's Business Initiative

Nelson McCulloch played his flute for county residents as they filed into the Jefferson County Courthouse. Steve Gates for The Wall Street Journal

There is just one problem: The city is the county seat for Jefferson County, which last year filed the biggest municipal bankruptcy in U.S history.

As Birmingham weighs a return to the bond market, its leaders will soon find out if the city will pay a price for its inconvenient geography. It is likely the city will pay higher interest rates than similarly credit-worthy cities and towns.

The city and county keep their finances separate, and the contrast between them is stark. Jefferson County recently cut back services at its hospital for the poor and skipped a debt payment to preserve cash. The roads department has stopped picking up road kill. County officials expect to run out of reserves by October.

Meanwhile, Birmingham, the county's largest city, is planning to sell $75 million in bonds to pave roads, install new street lights and possibly replace an aging auditorium. City officials have launched a charm offensive trying to convince companies, corporate-relocation firms and anyone else who will listen that Birmingham is no Jefferson County. "We are not trying to sweep the bankruptcy under the rug,'' said Dave Rickey, a spokesman for the Birmingham Business Alliance. "But there are a lot of good things going on in Birmingham."

When the county sought protection from creditors last November, Gov. Robert Bentley, a Republican, warned the filing could increase borrowing costs for other Alabama communities.

ENLARGE

So far, officials in several other healthy Alabama cities said they have sold debt without meaningful increases in borrowing costs. And municipal-bond traders have told Birmingham's finance director, Tom Barnett, that the city would likely have to pay only about $1.7 million more in interest over the life of the 30-year bonds because of jitters over the Jefferson County filing.

Still, bankers caution that demand could dry up by the time the city is ready to sell its debt. Some investors already have said they are steering clear of bonds issued by Alabama cities and counties. "We have been advised that there are investors who have chosen to avoid Alabama, generally," says Phil Dotts, a managing director at PFM Group, who advises municipalities on bond deals. He said he believes it is a "small" group.

A successful bond sale would challenge the view that bankruptcy filings would make it more difficult for borrowers to access the municipal-debt market. Such fears have driven efforts by states such as Rhode Island to thwart localities from heading to bankruptcy court.

Investors in the $3.7 trillion municipal bond market may need the least amount of persuasion. With a meager supply of new bonds for sale and historically low interest rates, investors are snapping up the debt of cities and states, often at low yields. Even with the Jefferson County bankruptcy, this is "the perfect market to be Birmingham," says Matt Fabian, a managing director of Municipal Market Advisors.

The city's bonds will be backed by a reserve fund of property tax revenue that can only be used to pay debt that city voters approve. Its reserves total about half of its $365 million in annual revenue, an "extraordinarily high" level, says one Moody's Investors Service analyst.

"Our perception is that Birmingham is a reasonably well-run city compared to its peers," says Michael Schroeder, principal at Wasmer, Schroeder & Co.

ENLARGE

Construction for a new baseball stadium in Birmingham was financed with a loan, when the city feared it couldn't access the bond market.
Steve Gates for The Wall Street Journal

Birmingham has more control than the county over raising its taxes. The $427 million debt that the city owes has no interest-rate swaps, a type of hedge that ended up costing Jefferson County millions.

But city officials feel like they remain tainted by the bankruptcy. William Bell, who became Birmingham mayor in 2010, said a television documentary discussing the Jefferson County's debt problems showed a scene of Birmingham City Hall. "It is the little things that are frustrating for us," he says.

In Birmingham, incomes are lower than the national and Alabama averages. But an increase in auto manufacturing has helped bring down the Birmingham area's unemployment rate to 5.9% in April, the most recent month for which data is available. That is lower than the 8.2% national rate in May.

The city also is building a minor-league baseball stadium that is financed partly with a loan from BBVA Compass, the U.S. arm of Spanish bank BBVA. The loan was obtained only a month after the Jefferson County filing.

At the time, city officials opted not to tap the municipal bond market, fearing they would have difficulty selling the bonds due to the bankruptcy.

Six months later, city officials are feeling more confident. The City Council needs to sign off on the proposed $75 borrowing and then it would go to the voters probably sometime this fall.

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